In the fourteenth of the CPS' 'UK Policy Resolutions for 2012' series, academic Kieron O’Hara examines what he feels should be the Coalition’s priorities in 2012. This morning, in the thirteenth in the series, Robert Colvile called for more reform to public services.
UK Policy Resolutions for 2012:
- Push more open data onto the web
- Ensure immigration doesn’t keep creative people out
- Push ahead with education reforms
- Increase capital spending on less glamorous projects
It’s the economy, as they say. The surprised reaction to the downbeat Autumn statement from George Osborne, and the accompanying judgment of the Office for Budget Responsibility, was odd, as if the signs had not been there for all to see previously.
The economy will be flat, or growing very slowly for some time. There are five principal reasons for this.
- Levels of debt in the economy, private, corporate and public, are unfeasibly large. Consumers will be deleveraging for some time, while governments will be cutting spending. Companies will have to accept that the Modigliani-Miller theorem does not justify indefinite leveraging. Banks will also have to reduce lending as they work to hit their capital targets.
- Even if debt were not large, saving would have to increase dramatically as people need to increase their pension funds. Future growth cannot be guaranteed to meet pension needs, and equities will increase in value slowly if at all as the baby boomers retire.
- Asset prices will continue to fall, especially as those with smaller pensions will need to draw down on these more aggressively. Research shows a strong link between ageing populations and falling asset prices.
- Emerging markets may not grow as quickly as they have, but are unlikely to shrink. This will continue to put upward pressure on commodity prices, including oil and industrial materials such as heavy metals.
- Climate change might exact a price, either of mitigation or adaptation. The benefits of green industry are hardly likely to make up the shortfall.
So, disaster looms. Pro-growth policies are essential, not that there will be much growth. In this situation, government must do whatever it can.
Some popular policies are unlikely to help much. Tax cuts will be saved, not spent. Forcing banks to lend will merely prevent them hitting their capital targets and ramp up risk once more. Badly-targeted capital spending, such as the ludicrous high speed rail project, will divert money from useful causes.
UK POLICY RESOLUTIONS IN 2012
Here are four things that the government should consider. They will help, and be more efficient than other measures. The first three are relatively cheap ways of boosting innovation over the short and the medium term.
- Continue the transparency programme. Push more open data out onto the Web, to support the development of innovative services.
- Ensure immigration controls don’t keep creative people out. In particular, ease the difficulties for students to get visas for study here. Students are currently treated, absurdly, as if they were permanent immigrants.
- Push ahead with education reforms.
- Increase capital spending on the less glamorous projects which give a better return. Improve roads, and existing commuter rail networks, increase energy supply, improve school buildings.
Above all, manage expectations downwards. Don’t blink, and don’t get tempted into a spending splurge.
Dr. Kieron O’Hara is a senior research fellow in Electronics and Computer Science at the University of Southampton. His latest book, 'Conservatism', was published in May 2011 by Reaktion Books. He blogs regularly for the Centre for Policy Studies.
This article represents the views of the author only and does not necessarily represent the policy outlook of the Centre for Policy Studies, its board, staff or affiliated members.
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